Wednesday, September 19, 2012

“On June 5th, voters in Wisconsin were asked to choose between going backwards to the days of double-digit tax increases, billion dollar budget deficits and record job losses, or moving forward with reforms that lowered the tax burden, balanced the budget and helped small businesses create more jobs.” - Wisconsin Gov. Scott Walker delivered Tuesday, August 28, 2012 at the Republican National Convention in Tampa, FL.

The State of Wisconsin budget is not balanced when using GAAP accounting. Using the honest method of accounting (GAAP), the State of Wisconsin has made zero progress to date.

I believe Act 10 will be positive for the state of Wisconsin and hopefully accrue further benefit to the state’s citizens going forward. What follows in no way changes the fact that Walker inherited and did not create the deficits (there are two deficits: cash and GAAP) that the state faced on the day he entered office. His many predecessors, including Thompson and Doyle, saw to that, along with a long line of state legislators. What follows also cannot take into account the savings that may continue to flow to local districts as a result of changes the legislature and Walker have made. An early example of this is the recent estimate of MPS saving perhaps $1 billion on future benefit obligations as a direct result of Act 10 (http://www.jsonline.com/news/education/mps-retiree-benefit-costs-drop-vn6t5fj-170103166.html). However, in 2010 Walker promised to begin using the honest method of accounting (GAAP) to balance the state budget. He should explain why we have not done so yet. If Walker and others are going to claim we have a balanced budget, they should explain that they only mean in the cash accounting sense and let the voters know the large difference between the two accounting methods of cash and GAAP.

A brief introduction to 'cash accounting' versus 'GAAP accounting:' GAAP = Generally Accepted Accounting Principles...it is required to be used by corporations, 35 states use it for their budgeting, and many other entities use it. The cash accounting method allows the state of Wisconsin to use maneuvers to bring the budget into balance only in a cash accounting sense, such as pushing current liabilities into future budgets or counting anticipated revenue before it materializes. Think of the $2,000 you have on a credit card from buying a big-screen HDTV and sound system for the party room. GAAP takes that very real future liability into account now, cash accounting does not.

1. Cash balancing is a far cry from GAAP balancing. Walker uses creative debt refinance to help 'balance' the budget in a cash accounting sense only. I believe this was one of the more disingenuous ways the budget has been 'balanced.' This is akin to a homeowner going from a 15 year to a 30 year mortgage. It may lower my interest rate, it lowers my payment size, stretches my payments out, but costs me much more interest in long run and pays off nothing of the principal now. The Legislative Fiscal Bureau is the non-partisan state agency that keeps track of state finances. In the May 18, 2012 memo to Sen. Kathleen Vinehout (D-Alma), Fiscal Bureau analyst Al Runde wrote:

"Therefore, in total, since May 2011, the state has issued additional debt to restructure, or make the principal payments on, approximately $558.3 million in GPR (general purpose revenue) supported principal that would have otherwise been paid off in 2010-11 and 2011-12. As a result, that principal will now remain outstanding for a longer period of time and thus an estimated $156.2 million in additional interest costs could be incurred by the state."

This is just one example and the easiest to highlight that shows one of many ways that ‘cash accounting’ can as stated above bring the budget “into balance” only in a cash accounting sense by 1) pushing current liabilities into future budgets or 2) counting anticipated revenue before it materializes.

2. Walker promise to use GAAP budgeting has gone unfulfilled. Walker promised during his initial campaign to switch to GAAP accounting when he became governor "...to balance every state budget, just as we require every local government and school district to do." As of yet this has not happened. "Wisconsin is one of only 15 states not using GAAP accounting, and according to recent figures, our $2.99 billion GAAP deficit is one of the largest in the nation. Only New York, New Jersey, California, and Illinois have larger GAAP deficits."

In some state governments (again, ours is one of 15), cash accounting is used to claim whether the state budget is balanced or not. This is very different from GAAP accounting. GAAP is what corporations must use or the senior execs could go to jail. The Walker administration is using cash accounting still to claim a balanced budget and in spite of campaign promises. On page 34 on the Wisconsin Budget in Brief (link below) you see from the administration itself that we are running an approximate $3 billion dollar GAAP deficit - Table 7. Doyle's cash accounting deficit was about $3.6B, but Doyle's GAAP deficit was the same $3 billion that the state of Wisconsin still has. Exactly zero progress has been made on the GAAP deficit. Actually, the GAAP deficit is projected to grow slightly under Walker's budget per his own budget in brief, from $2.90 to $2.98 billion.

3. The republicans seemingly punted on the GAAP bill in the last session when they had a majority. A bill (AJR 100) easily passed the State of Wisconsin assembly in February 2012 (69 to 25). AJR 100 is a measure that, if approved by voters, would eventually prohibit the legislature from passing any bill that would increase the projected deficit under GAAP. There was broad bipartisan support in the assembly.

It went on to the Senate, but I couldn’t be sure what happened from online resources. For help I contacted three legislator’s offices to see what happened after the bill reached the Senate in late February. Interestingly, it sat for a month in the Senate and died when the session ended in March, just prior to the recall elections. When contacting legislators I was told it was not prioritized by the Senate Majority Leader (Scott Fitzgerald). I was told by one legislative aide that "it is up to the Senate Majority Leader to create the priority list of what will come up for vote and consideration. I don't know why Sen. Fitzgerald did not do so on this bill." I then asked if the Majority Leader can be influenced by other members of the Senate to prioritize bills. The reply was, "Yes, absolutely."

Perhaps it innocently slipped through the cracks. But, in late February 2012 when this came out of Assembly, the GOP held a 17-16 majority in the Senate. Even assuming no democratic support in the Senate, in spite of broad bipartisan support in the assembly, why not bring the bill up for a vote? On March 17, 2012, the Senate became 16-16 after a GOP senator resigned just prior to the end of session in late March. Subsequently, the GOP lost a seat in the senate in Racine County, Van Wanggaard. The tide is now turned 17-16 against the republicans in favor of the democrats. Why wasn't AJR 100 prioritized prior to the session ending? Interestingly, as I understand it, the way the bill is written it would go to Senate for approval and assuming Senate approval, it would then go to ballot to the people to make it part of the state constitution. Let's hope it fares better the next time if it is introduced again in the next session.

4. Act 10 reforms are far more moderate than anyone has been led to believe. This article (link below) is written by a Heritage Foundation researcher. The article points out to both sides of the public sector union debate that the reforms by Walker on public pensions were far more moderate than either side may believe. It is a good start which should be applauded. Many pensions assume unrealistic rate of return assumptions to make their liability seem lower to all.

5. The Walker administration admits the state budget is not balanced. To keep the possibility alive of making further cuts to state health programs, the Walker administration certified to the federal government on December 29, 2011 that the state had a deficit. Could you repeat that please? I thought we have balanced the budget. Another possible angle to explore here is this: Federal law allows the state to drop thousands of adults from Medicaid to save money on health care costs if the state can show it has a deficit. Walker has said he wants to cut health care spending in other ways, but hasn't ruled out dropping thousands of adults if the other methods aren't approved by the federal government. To keep that option alive, state Administration Secretary Mike Huebsch wrote in a December letter to the U.S. Department of Health and Human Services that the state would have an undisclosed deficit from January 1, 2012 through June 30, 2013. "It's nothing more than what we've been saying all along," Walker spokesman Cullen Werwie said. Really?

6. State of Wisconsin government spending is growing again already. Walker’s own budget (p. 26 in link below) begins growing government again in year two (2012-2013). “The Governor recommends an operating budget of $29.261 billion in fiscal year 2011-12 and $29.984 billion in fiscal year 2012-13. These figures include all four major funding sources and all state agencies and programs (see Chart 2). On an annual basis, the Governor's all funds budget for fiscal year 2011-12 represents a decrease of $2.486 billion (-7.8 percent) over the fiscal year 2010-11 adjusted base, and the budget for fiscal year 2012-13 represents an increase of $723.6 million (2.5 percent) compared with fiscal year 2011-12. Much of the fiscal year 2011-12 decrease is related to increased government employee contributions to their retirement plans and health insurance, as well as removing certain non-GPR appropriations from the budget related to the creation of the University of Wisconsin-Madison as a separate entity.” I hold out hope based on the legislature’s and governor’s success in his first year, but at first glance it appears the cuts will be harder to come by, even by Walker’s own budget.